Wednesday, September 2, 2009

Judge Cavanaugh just posted another opinion -- this time, in Manson, denying Schering-Plough's motion to dismiss the ENHANCE-related federal securities would be class action. And he's gone out of his way to signal that he thinks the plaintiffs have mustered-up a pretty good set of claims:

. . . .Plaintiffs, purchasers of Schering-Plough Corp. (“Schering”) securities during the period July 24, 2006 to March 28, 2008, allege that Schering, five members of its senior management, eleven of its current directors and one former director, and eighteen underwriters that participated in Schering’s August 2007 public stock offering (the “Offering”) are liable in damages for unlawful misstatements and omissions made in connection with the Offering relating to the cholesterol drug Vytorin and the ENHANCE clinical study. . . .

The Court finds. . . that Plaintiffs repeatedly alleged misstatements and omissions relating to, inter alia, the efficacy of Vytorin, the ENHANCE study, and Schering’s financial outlook, and that Plaintiffs described those statements and omissions with sufficient particularity to demonstrate the “who, what, where, when and how” for each. Accordingly, Defendants’ motion to dismiss on this basis is denied.

Second, the Court finds that Plaintiffs have raised sufficient facts in the Complaint to create a “strong inference” of scienter that is “at least as likely as any plausible opposing inference.” See Tellabs, 551 U.S. at 328. Scienter is a “mental state embracing intent to deceive, manipulate, or defraud, and requires a knowing or reckless mind.” See Institutional Investors Group v. Avaya, Inc., 564 F.3d 242, 252 (3d Cir. 2009) (internal citations omitted). Plaintiffs allege that the Exchange Act Defendants knew of the ENHANCE study results prior to their unblinding in January 2007, and that they knowingly withheld the results even though such omission tended to make the facts that were disclosed untrue. In support of their claim, Plaintiffs plead a series of factually-specific allegations in the Complaint allegedly showing that the Exchange Act Defendants had early knowledge of the ENHANCE results and intentionally concealed it, including, inter alia:

(1) that Defendants learned from data checks as early as 2005 that the study had data quality problems and was likely to produce negative results;

(2) that the ENHANCE data was discussed at internal Schering-Plough “Brand Team” meetings as early as 2006, corroborated by confidential witness (“CW”) statements alleging that the ENHANCE data gathered from “quality control assessments” was regularly discussed at the meetings by company doctors and executives who “did not like the kind of results they were seeing";

(3) that, even if blinded, the test results were readily discernible by Defendants due to their access to the data points, essentially leaving the test “functionally unblinded”; and

(4) that the Exchange Act Defendants deliberately delayed announcing the study results under the pretext of data quality problems, as evidenced by, inter alia, the January 2007 report from an independent consultant finding that the data was “fine,” of “little concern,” and “no better, no worse” than similar studies, and emails from the principal investigator in July 2007 protesting Defendants’ decision to postpone disclosure of the study results. . . .

Additionally, the Court finds it “at least as compelling” to construe Plaintiffs’ allegations as creating an inference that Defendants knowingly withheld and concealed the adverse ENHANCE results as it is to construe them as merely showing that Defendants were acting to “remedy data quality problems.” Accordingly, the Exchange Act Defendants’ motion to dismiss is also denied on the basis. . . .

Full opinion (as a PDF file), and more, soon. In my estimation, Merck should read this as a "friendly suggestion" (from Judge Cavanaugh) that it ought to consider settling, should it end up going forward with the reverse merger.

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